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Having a job that you are passionate about has its perks and intangible benefits. It makes you happy, excited, and motivated about work and, as a result, boosts your productivity and performance. Some of the most satisfied workers in the United States are self-employed. These individuals have the satisfaction of being your boss, choosing the work you want to do, and having a more flexible work schedule.
The Center for American Progress reports that there are about 16.5 million self-employed people in the country.1 If you are an independent contractor, freelancer, or sole proprietor, it is essential to understand the self-employment tax, how it works, and your tax obligations. This blog article from Balboa Capital has all of the vital information you need to know about self-employment taxes.
Calculating self-employment taxes.
The IRS requires self-employed individuals to pay their estimated quarterly taxes and file an annual return on or before the tax deadline. Taxes will not be automatically deducted from your paycheck if you are self-employed. You will be responsible for keeping your accounting information up-to-date and paying them on time. One way to ensure that you meet your obligations is to set aside money throughout the year. That way, you will not have a cash shortfall that prevents you from paying Uncle Sam.
Determining how much money you should save to pay your taxes will depend on several factors. For starters, find out your tax rate and check to see if your city requires separate taxes. Nerdwallet reported that 2024 self-employed taxes are 15.3%, with 12.4% going to Social Security and 2.9% to Medicare.2 In 2024, the first $168,600 you make will be subject to the Social Security portion. If you are a single filer and your net earnings surpass $200,000, your Medicare tax rate might increase by an extra 0.9%.3
Next, review your books and calculate your net earnings for each quarter and the year. The formula to get this number is easy. First, you need to subtract your business expenses from your gross income. Once you have figured out how much your net earnings are, apply the 15.3% rate. Your self-employment tax for the quarter (or year) is the resulting number.
Filing self-employment taxes.
You will need to file a Schedule SE (Form 1040 or 1040-R) if your self-employment earnings total $400 or more or if you received a 1099 form from a business or entity you performed work for. If your net earnings were less than $400, you would still need to file a return if you meet one of the IRS’ other filing requirements. It would be included in your gross income if you showed a profit. If you showed a net loss, you might be able to deduct it from your gross income. Check with your accountant, as everyone’s situation is unique.
Making quarterly payments.
The IRS requires you to make quarterly estimated tax payments during the year if you expect to owe $1,000 or more in federal income taxes when your return is filed. You must use IRS Form 1040-ES to make your estimated quarterly taxes payments. Here are the dates when payments are due:
| Time Period | Tax Payment Due Date |
| January 1 to March 31 | April 15 |
| April 1 to May 31 | June 15 |
| June 1 to August 31 | September 15 |
| September 1 to December 31 | January 15 of the following year |
If you are not entirely sure how to file your self-employment taxes, it is a good idea to have an accountant do it for you. They have the knowledge and expertise to ensure that your return is accurate and filed promptly. In addition, this can significantly reduce the chance that the IRS audits you.
Potential tax deductions.
Being self-employed presents you with some nice tax breaks. First, you can deduct 50% of your self-employment tax when you file your return. That means if you end up owing $5,500 this year, you will need to pay that amount in quarterly payments. Then, when tax season rolls around, you can deduct $2,250 on your return, which is half of the $5,500 you already paid.
There are also some write-offs available to self-employed individuals. These include vehicle expenses, home office expenses (furniture, percentage of rent/mortgage, electric bills, etc.), office supplies (computers, software, etc.), and health insurance. However, there are limits to how much you can deduct, and they can change without notice. So, visit the IRS website or consult a tax professional to get the latest rules and information.
References:
1 – https://www.americanprogress.org/article/understanding-the-self-employed-in-the-united-states/
2, 3 – https://www.nerdwallet.com/article/taxes/self-employment-tax
Balboa Capital, a Division of Ameris Bank, is not affiliated with nor endorses The Center for American Progress or NerdWallet. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.